Creditors are faced with various issues when processing payments from their customers. One such issue is the inherent delay when processing payment checks. As an example, a credit card company may receive a payment check, but until the check is cleared through the banking system, the card company may not know if the account is good or there are sufficient funds to cover the check.
Fraudulent schemes have been devised to take advantage of the delay between a check being received and a check being cleared for payment by a bank. One such scheme is sometimes referred to as “bust out fraud.” A person with a credit card account makes payment by check, but the check is drawn against an account that is known (by the cardholder) to be closed or to have insufficient funds. A credit card company may post the check (before it is presented to the paying bank) and restore some or all of the credit card limit. The cardholder then quickly makes additional purchases. Before the credit card company receives notification from the bank that the check has not cleared, the cardholder may in fact have made numerous purchases (and possibly sent in several more bad checks) before the scheme is uncovered.
While credit card companies may attempt to stem losses from such schemes by suspending a payment credit until a check clears, such a practice penalizes honest cardholders and prevents them from fully using their card account until the check clears. This may give rise to frustration on the part of the cardholder, and also reduced card use (and reduced revenue for the credit card company).
Solutions have been adopted for minimizing some of these difficulties by providing up-to-date account status to creditors when a payment (such as a check) is received. For example, the remittance risk service provided by Early Warning Services, LLC, Scottsdale, Ariz., provides notice to banks, creditors and payment processors of account status when checks are deposited or used for payment. A database stores current information on checking and similar accounts at most U.S. banks, so that upon receipt of a check, the recipient may electronically access the database and immediately determine the status of the account against which the check is drawn. Checks drawn against accounts that have been closed or have some other questionable status may be flagged for further investigation or rejection (i.e., posting a credit payment may be delayed or refused).
While such services may reduce the risk from fraudulent check schemes, it does not eliminate burden to the creditor (e.g., in following up on flagged accounts), or the possible negative customer impact if the flagged account is questionable for reasons other than fraudulent activity by the customer. For example, a trustworthy customer himself or herself may have been the victim of fraudulent activity (e.g., identity theft), and the creditor and customer may both need to investigate reasons for a flagged, high-risk status. Or, when payment to a creditor is in the form an automatic monthly draft against an account using the ACH (automated clearing house) system, a customer may have closed an account without remembering to change the payment authorization to a new account. Receiving notification of refusal to honor a payment (or having fees automatically assessed for a payment being rejected) may lead to hard feelings on the part of a valued customer, and result in loss of customer goodwill.